Canada inflation rate cools in May, making July rate hike less likely

OTTAWA: Canada's annual inflation rate cooled more than expected in May, moving it further away from the Bank of Canada's target and reducing the odds of an interest rate hike next month.

The annual inflation rate declined to 1.3 percent from April's 1.6 percent, Statistics Canada said on Friday, the lowest level since November 2016 and below forecasts for 1.5 percent.

The three measures of core inflation the Bank of Canada set last year remained subdued, with two of them declining.

Economists said the figures give the central bank room to hold off on raising interest rates at its next meeting in July after hawkish comments from two top policymakers last week set the stage for hikes sooner than had been anticipated.

"When we're looking for reasons for the bank to take its time in raising rates, core inflation has been exhibit A," said Doug Porter, chief economist at Bank of Montreal.

"Certainly very modest core inflation continues to rumble in the background as a pretty strong reason for the bank not to rush the proceedings. That story was just pounded home today."

The Canadian dollar weakened against the greenback, while markets reduced the likelihood of a July hike to 22 percent from 34.8 percent before the report was released.

Nonetheless, a hike by the end of the year is nearly fully priced in, suggesting markets do not expect weak inflation to delay the bank for long.

The bank, which has an inflation target of 2 percent, has held rates at 0.50 percent since 2015 when it cut borrowing costs twice to offset the hit from cheaper oil.

CPI common, which the central bank says is the best gauge of the economy's underperformance, held at 1.3 percent. CPI median, which shows the median inflation rate across CPI components, declined to 1.5 percent, while CPI trim, which excludes upside and downside outliers, dipped to 1.2 percent.

Food prices fell on an annual basis for the eighth month in a row, down 0.1 percent as consumers paid less for meat and fresh fruit.

Still, food price declines have been moderating in recent months and the cost of fresh vegetables rose for the first time since August 2016.

Gasoline prices were up 6.8 percent, slowing significantly from April's 15.9 percent annual increase. Shelter costs also moderated as electricity prices fell, particularly in Ontario, where the provincial government has introduced measures to alleviate high electricity costs.